In the latest boost to BlackBerry’s (NASDAQ:BBRY) stock, CEO Thorsten Heins said that the new BB10 smartphones are off to a flying start in its home country, Canada. In an enthusiastic statement issued Wednesday, the company said that the new BB10-based Z10 smartphones had the best ever first day launch for a BlackBerry phone in Canada. Specifically, sales were “more than 50 per cent better than any other launch day” for BlackBerry in the country. Demand for the new smartphones in the U.K. was also strong with the company reporting its first week sales to be close to three times better than its previous record in the country.
The strong launch day demand is a good sign of the huge pent-up demand that has built up ahead of BB10′s delayed launch and that loyal BB users have stuck to the company despite the delays. BlackBerry’s shares surged by 6% on the announcement and are already up over 30% this month. However, the company refused to divulge details about the actual sales numbers or any context as to how big its previous sales record was.
Considering that BlackBerry’s smartphone market share has been on the wane for quite some time and that the smartphone market has more than doubled in size over the last two years, it is hard to put any kind of context around the announcement. Moreover, these are still early days and BlackBerry will need to ensure that the demand doesn’t fizzle out post the initial euphoria in order to stage a turnaround in its smartphone business – something that could prove exceedingly tough in a smartphone market largely dominated by the iOS and Android.
Keeping this in view, we maintain our $12 price estimate for RIM’ stock, about 30% below the current market price. An upside/downside to our price estimate completely hinges on the sustainability of the initial success and the kind of market share gains that BB10 sees in the coming months.
80M Installed Base Crucial
Strong initial demand for BB10 in the developed markets of U.K. and Canada should however give BlackBerry a breather following the sharp decline in market share it has seen over the past year. The beleaguered company’s BlackBerry unit sales have fallen year-over-year for the last six consecutive quarters. Last quarter saw BlackBerry ship only 6.9 million BlackBerrys, a precipitous drop of more than 50% y-o-y and about 7% q-o-q.
What has hurt BlackBerry the most is the drop in perceived brand value in what is one of the most lucrative smartphone markets in the world, the U.S., where the company has now lost its 3rd position to Windows Phone. According to Strategy Analytics, Q4 2012 saw Windows Phone make good market share gains on some high-profile smartphone launches to overtake BB for the first time ever. BlackBerry will he hoping to reverse the losses now that BB10 is out but delays in launching the first BB10 smartphones on U.S. soil is going to make it much tougher. According to the company, the first BB10 device won’t be launched in the U.S. until mid-March at least.
In such a scenario, where BlackBerry will be looking to push its latest smartphones is to its installed subscriber base. Despite falling market share, BlackBerry has been able to retain most of its 80 million subscriber base. It is on the back of its huge subscriber base that the company has been able to sustain cash flow through steady high-margin carrier fees despite reporting net losses for three quarters straight. And with BB nowhere near its peaks of customer appeal, RIM will be primarily looking to get this installed base to upgrade to BB10 initially.
Push Email Division Key
At the same time, RIM will bank on the push e-mail and BBM service revenues from existing subscribers to tide over this difficult transition period. The company has said that it is looking to leverage the security strength of BlackBerry services that governments and enterprises around the world have come to rely on. We believe the BlackBerry services, which include push e-mail and BBM, are unique value propositions for RIM’s customers, and the company is doing the right thing by realigning its focus on this segment as it negotiates the BB10 transition. Our estimates show that this is RIM’s most valuable division currently, accounting for more than 35% of our price estimate for the stock.
But a carrier push to reduce fees as well as a loss of more enterprise customers to rival platforms as the bring your own device (BYOD) movement becomes more popular could hinder RIM’s strategic moves to boost revenues from the services division. In addition, the new BB10 devices will not be supported by the existing enterprise servers (BES) potentially making the BES 10 upgrade process costlier and complicated, thereby reducing RIM’s chances of pushing BB10 into the enterprise base. (see BES 10 Fragmentation Increases The Risk For RIM)
A lot depends on BB10′s reception in the market, and RIM faces an increasingly uphill battle against the two well-entrenched mobile ecosystems of the iOS and Android. The competitive pressures will come not only from potential customers deciding to purchase rival smartphones, but also from developers unwilling to devote their resources to a platform with questionable chances of taking off.
Although we do not expect RIM to ever reach the heights it once commanded in the smartphone market if RIM does manage to make BB10 a strong smartphone OS, it could still claw its way back into the market and continue to generate cash from its enterprise and retail niche. RIM’s mobile market share has plummeted from over 3% in 2011 to an expected 1.8% in 2012. However, if BB10′s launch helps RIM win market share back to over 3% by the end of our forecast period, there could be 30% upside to our price estimate.